The Pros And Cons Of Fha Loans
Before you choose what type of loan youll use, it’s important to weigh the pros and cons. A home is a big purchase, and theres a lot to consider.
- Pro: Lower qualification standards. FHA loans are often easier to get than other types of loans. If you have bad credit or a bankruptcy in your past, this option might be right for you.
- Con: Lower lending limits. FHA loans have much lower lending limits than traditional loans. If you want to purchase a home above these limits, you’ll need to use a different type of loan or find a different house.
- Pro: Lower down payment. This is one of the main draws of an FHA loan. With as little as 3.5% down, homeownership can become a reality for borrowers who wouldn’t otherwise qualify.
- Con: Mortgage insurance. FHA loans require MIP. The amount you pay depends on the price of your home and your loan-to-value ratio, but MIP will ultimately increase the overall cost of your loan. Unlike conventional loans, the MIP on an FHA loan wont be eliminated when the LTV is reduced to 78%.
- Pro: Competitive interest rates. FHA loans may offer interest rates at or below conventional loan rates. This can help reduce your monthly payment.
- Con: Primary residence only. While FHA mortgages can be used for single-family and multi-family homes, they can only be used for your primary residence. This means if you’re looking to buy a vacation home or second home, FHA loans won’t work for you.
How Long Do You Have To Buy Private Mortgage Insurance
Borrowers can request that monthly mortgage insurance payments be eliminated once the loan-to-value ratio drops below 80%. Once the mortgages LTV ratio falls to 78%, the lender must automatically cancel PMI as long as youre current on your mortgage. That happens when your down payment, plus the loan principal youve paid off, equals 22% of the homes purchase price. This cancellation is a requirement of the federal Homeowners Protection Act, even if your homes market value has gone down.
Mortgage Calculators For Fha Loans
Mortgage calculators are a wonderful tool to help you gauge what your first home will cost and how long it will take you to pay off your first mortgage. We have several types of mortgage calculators to help you know just what you can afford when youre ready to buy your first home. You can even determine what you would need to do to pay off your mortgage early. Weve included a few links below to specific mortgage calculators.
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Pay The Mortgage Down To 78% Of The Purchase Price
Because of the Homeowners Protection Act, PMI now has a default setting. This is a level at which it a lender must cancel it automatically. The mortgage servicer is required to drop your PMI coverage when the outstanding balance of your mortgage drops to 78% of the original value of your home.
If the original purchase price on the house was $200,000, your lender must cancel PMI when your outstanding loan amount drops to $156,000. This is 78% of $200,000.
This should happen even if you do nothing in an attempt to remove the PMI. You must, however, be current on your mortgage at the time this happens. Otherwise the lender is not required to remove the coverage.
You Can Make An Offer That Sellers Take Seriously
Preapproval lets you know the price range of homes the lender may approve. You can look for houses in neighborhoods and home styles that suit that range, knowing that approval is likely.
Finally, preapproval gives you a competitive edge over other buyers.
If more than one person bids on the home you want, the seller is very likely to choose folks who have been preapproved. Sellers are picky in this market and will simply toss out offers without strong financing attached.
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How To Apply For An Fha Loan
Applying for an FHA loan is simple when you know how. Follow the steps below to get started:
Getting an FHA loan can be easy when you understand how the process works. Though it can seem difficult to understand all the details, our Home Lending Advisors are here to guide you through each step.
How Hard Is It To Cancel Pmi
Private mortgage insurance might be one of the costs that you most hate to pay when you send in your mortgage payment each month. Its not necessarily because of the expense. Its because this insurance doesnt cover you. Instead, it protects your lender in case you default on your loan.
Fortunately, you dont have to pay private mortgage insurance, or PMI, forever. Once you build up at least 20 percent equity in your home, you can ask your lender to cancel this insurance. And your lender must automatically cancel PMI charges once your regular payments reduce the balance on your loan to 78 percent of your homes original appraised value.
As home prices continue to rise, you might be closer to canceling PMI than you think. If your homes value has increased since you bought it, which might be likely in some areas, you might have automatically built up more equity in it. Thats because your equity increases when the value of your home rises.
Is cancelling PMI early once your loan balance hits 80 percent of your homes current appraised value worth the work?
That depends. Youll need to prove to your lender that youve actually built up that 20 percent equity. And to do this, youll probably have to order a new appraisal of your home. If your PMI payment is high, though, taking this step might make sense.
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How Do You Qualify For An Fha Loan
Because FHA loans are backed by a government agency, they’re usually easier to qualify for than conventional loans. The purpose of FHA loans is to make homeownership possible for people who would otherwise be denied loans.
You don’t need to be a first-time homebuyer to qualify for an FHA loan. Current homeowners and repeat buyers can also qualify.
The requirements necessary to get an FHA loan typically include:
- A credit score that meets the minimum requirement, which varies by lender
- Good payment history
- No history of bankruptcy in the last two years
- No history of foreclosure in the past three years
- A debt-to-income ratio of less than 43%
- The home must be your main place of residence
- Steady income and proof of employment
Different Types Of Fha Loans
The FHA offers a variety of different loan programs besides purchase loans to meet the needs of homebuyers and homeowners throughout their financial lives.
|Type of FHA loan|
|Borrowers can purchase or refinance a home and roll the costs of the renovations into one loan with the FHA 203 rehab loan program|
|Energy-efficient mortgage||Homeowners can add the cost of energy-saving upgrades to the balance of a purchase or refinance loan with an FHA energy-efficient mortgage|
|Home equity conversion mortgage||More commonly known as a reverse mortgage, the HECM loan gives borrowers age 62 or older multiple options to access their equity and avoid a monthly payment|
|Section 245 loan||This program gives qualified borrowers the option to choose a loan with lower initial payments that increase as their income rises , or the choice to increase principal payments and pay off the loan faster|
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Fha Loan Interest Rates In 2021
Mortgage rates hit historic lows in 2020. Although theyve climbed somewhat, theyll likely stay low through the end of 2021. Thats as true for FHA mortgage rates as other loan programs.
Rather than focus on average rates, however, remember that whats happening in the market doesnt really reflect the rates youll receive on an FHA or any mortgage for that matter.
Thats because lenders set your interest rate based on things like your credit score and how much money you want to borrow.
Lets assume you have a 750 credit score, a 10% down payment, and your prospective homes purchase price is $200,000. You represent less risk to lenders than someone with a 620 credit score and a 3.5% down payment who wants to buy a $300,000 home.
A lender might give you a lower interest rate because theyre loaning you less money and your higher credit score tells them youre more likely to pay them back.
A tip on interest rates: If youre applying for quick quotes online, beware. The mortgage amount and rate quotes you receive may not reflect your true borrowing power. The only way to get an accurate estimate of your rate and borrowing potential is to get preapproved with a lender.
Where Can I Apply For An Fha Loan
The FHA doesnt offer loans directly, so youll need to contact a private lender to apply.
The majority of lenders are FHAapproved, so youre free to choose a local lender, big bank, online mortgage lender, or credit union.
To find a good FHA lender, you can get recommendations from friends or family whove used an FHA loan. You can also check with the Better Business Bureau to review a bank or mortgage lenders rating and read online reviews.
Keep in mind that credit requirements for FHA loans vary from lender to lender. While many lenders allow a credit score as low as 580, some might set their minimum at 600 or even higher. So if your score is on the lower end of qualifying for an FHA loan you might need to shop around a little more.
Regardless of credit score, you should find at least three lenders you like the look of and apply with them.
FHA mortgage rates can vary a lot between lenders, and you wont know which one can offer you the best deal until youve seen personalized quotes.
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Review Fha Closing Costs And Sign The Final Documents
The last step in getting an FHA loan is reviewing your closing costs and signing the documents. Be aware that there will be other costs at signing, known as closing costs, but you might be able to negotiate having the seller pay them.
If you cant arrange that, you can pay the costs upfront or add them into the loan. Each local FHA office determines which specific costs and amounts are reasonable and customary. Here are the items you need to bring with you at closing:
- Valid identification
- Proof of homeowners insurance
- Closing funds in either a cashiers check or an electronic wire
Take the time to go over the closing documents carefully with a notary and verify all the information is correct. Once you sign on the dotted line, you are legally bound to that mortgage, and the only way youll be released from that responsibility is by selling your home, paying off your mortgage or foreclosing on your property.
Ashley Eneriz contributed to the reporting for this article.
Can You Apply For An Fha Loan More Than Once
There’s good news and there’s bad news here: FHA loans aren’t limited to first-time home buyers, and there’s no restriction on how many times you can take out an FHA loan in your lifetime.
However, because these loans are for primary residences only, you generally can’t have more than one at a time. There are some exceptions, however, such as if you’re relocating for an employment-related reason or if you’re permanently vacating a jointly owned property .
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Can You Get An Fha Loan If You Have Student Loans
Yes, you can get an FHA loan if you have student loan debt, though you’ll still have to meet FHA debt-to-income requirements. FHA student loan guidelines state that lenders must include all student loans when calculating a borrower’s debt-to-income ratio. If your payments are currently deferred, your lender will consider your “monthly obligation” to be 1% of your total student loan balance.
What Is The Fha
The Federal Housing Administration was created in 1934 to give renters in the U.S. better loan options for buying a home. Back then, you typically needed a 50% down payment and enough income to pay the loan off in three to five years.
Over time, the FHA loan program guidelines allowed borrowers to make a down payment as low as 3.5% and pay off the loan over a 30-year term. Lenders were, and still are willing to take the risk of making FHA loans because of the mortgage insurance premiums borrowers pay to protect them against financial losses if they default.
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How Do Fha Loans Work
FHA loans can give people with lower incomes or those with lower credit scores the ability to become homeowners. In order to offer a more relaxed credit requirement and a lower down payment, FHA requires you to pay mortgage insurance. If you defaulted on your loan, FHA would be responsible for paying off the remainder of your loan. Mortgage insurance limits the amount of money the lender may lose.
Mortgage insurance is considered a closing cost. Closing costs are the upfront fees required when you close on a home, and they’re separate from your down payment. Lenders and third parties can cover up to 6% of closing costs on FHA loans, including attorney, inspection and appraisal fees.
FHA-backed loans allow for financial gifts from family, employers and charitable organizations to help cover closing costs.
The borrower is responsible for paying two FHA mortgage insurance fees:
Who Can Apply For An Fha Loan
People who do not have perfect credit, have filed for bankruptcy in the past, or new homebuyers who are still working on their finances should consider an FHA loan. In cases where you may not qualify for a traditional loan, FHA financing may be right for you.
FHA loans may be a good match for new homebuyers who may still be working on their financial picture. Those who have been renting and dreaming of buying a home sometimes hesitate because their credit is not perfect or because itâs hard to save up 20% of the down payment of a home.
Fortunately, the more relaxed requirements of an FHA loan mean that more people can enjoy the American dream of buying their own property. FHA loans are available for properties with one to four units.
If youâre not sure whether this type of home loan is a match for your plans, speak to FHA loan lenders at Assurance Financial. We can explore your options together.
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Are There Fha Loan Income Limits
Good news: there are no FHA loan income limits.
That doesnt mean income doesnt matter. Lenders need to make sure you can afford your monthly mortgage payments, and theyll need documentation to prove it.
Fortunately, plenty of income types count:
- W2 wages
- Supplemental Security Income
- Social Security Disability Insurance
A loan officer may ask you for pay stubs, tax returns, and other verification of income before your loan can move on to underwriting .
Mortgage lenders also use your income to calculate your debt-to-income ratio , which well talk more about in just a minute.
Fha Energy Efficient Mortgage
This program is a similar concept to the FHA 203 Improvement Loan program, but its aimed at upgrades that can lower your utility bills, such as new insulation or the installation of new solar or wind energy systems. The idea is that energy-efficient homes have lower operating costs, which lowers bills and makes more income available for mortgage payments.
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Fha Home Loan Process Timeline
For many homebuyers, the biggest concern is whether or not they can afford the home of their dreams. An FHA loan may be the right loan for you, allowing you to purchase your dream home without the expense of a significant down payment. Purchasing a home is both a huge financial investment and a personal one this will be your primary residence for several years to come.
If you are a first-time homebuyer, you may be wondering how to start the FHA loan process. At CIS Home Loans, we developed this guide to break down the FHA loan process step by step.